Chapter 13 bankruptcy filers should be aware that they will be responsible for fulfilling certain obligations in connection with their request for a Chapter 13 repayment plan. Chapter 13 gives individuals several advantages over Chapter 7, such as being able to stop a home foreclosure and consolidating various debts into one payment under the plan. One important factor of a Chapter 13 bankruptcy is that the filer must have a regular source of income in order for a plan to be developed. Individuals who make less than Ohio's median monthly income will have a three-year repayment plan, while those with larger incomes will be required to make a five-year repayment plan.
Steps that must be followed in a Chapter 13 bankruptcy
The very first step that an individual must take is to file a petition for Chapter 13 bankruptcy. Along with that petition, a number of documents must be submitted:
- A copy of the individual's most recent tax return
- Proof that the individual has filed taxes for the previous four years
- A Chapter 13 repayment plan
- Proof that the individual took and completed a credit counseling course, and if applicable, a copy of any repayment plan that was created during that course
The filer will also need to submit information regarding all sources of income, personal and real property, living expenses and a list of creditors.
The next step is for the filer to pay the necessary filing fee. If the person cannot afford to pay the full amount of the fee at one time, he or she will be given up to four installments as long as the full amount is paid within 120 days from the date of filing, or 180 days if the court grants an extension.
Repaying the creditors
The final step that an individual must take is to make payments as required under the repayment plan. Those payments must be started within 30 days of filing the Chapter 13. An individual who is known as a bankruptcy trustee will keep those payments until the court confirms or denies the repayment plan, and if the plan is confirmed, the trustee will distribute the funds accordingly to the creditors. If the plan is denied, the funds will be returned to the individual, less any applicable administrative costs.
Payments made under the plan will be prioritized. For instance, all administrative fees must be paid in full, to include attorney's fees and the statutory trustee fee. Then, all priority debts must be paid in full, which includes alimony and/or child support, wages/salaries owed to employees, employment benefit plan contributions and tax debt that is not dischargeable. The individual must then pay any overdue amounts on secured debt over the length of the plan, such as mortgages and car loans, and he or she must also stay current on those bills. Any liens must also be paid, and then all disposable income must be used to pay unsecured creditors, like credit card companies, over the length of the plan.
Filing a Chapter 13 repayment plan can be an effective way for people to get back on their feet after a financial crisis.
Additional reasons why individuals may choose or need to file a Chapter 13:
1) Attempts to catch-up on mortgage or vehicle payments;
2) Debtor has too much equity to file a Chapter 7.
3) Debtor had file a Chapter 7 within the previous 8 years.
4) Debtor's income was too high to file a Chapter 7.
Interested individuals may want to speak with a bankruptcy attorney who can help them determine whether or not filing for bankruptcy protection would be in their best interest.